Debt and growth are slowly stabilizing

CHINA FINANCIAL - Report 29 Jun 2021 by Michael Pettis

• Analysts are increasingly worried that credit growth and economic activity are slowing at an unexpectedly rapid pace in China. I think however that this is mostly a consequence of their overly optimistic expectations for 2021, based on their misunderstanding of the way Beijing constructs and achieves its explicit or implicit GDP growth targets.

• If total social financing (TSF) continues to grow at the “slow” rate at which it grew in April and May (roughly 7.5 percent annualized), TSF growth in 2021 will be 9.0-9.5 percent. Because I expect GDP growth to be between 6 percent and 8 percent (probably closer to 6 percent than to 8 percent), this TSF growth rate is also in line with expected nominal GDP growth.

• In that case, Beijing will be able to do what it promised: to keep China’s debt-to-GDP ratio from deteriorating this year (a partial respite from the 25-percentage-point deterioration last year). On the other hand if China’s GDP were to grow by 8.5 percent this year, as the consensus still has it, China’s debt-to-GDP ratio would rise by at least 3-5 percentage points.

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